We’ve all made financial mistakes that we hope our children won’t repeat, but an unfortunate fact remains. Kids don’t always listen. To make matters worse, money management rarely makes the list of top teenage priorities.
Once you’ve accepted these realities you can begin to develop an effective strategy to teach them financial literacy – using lessons that will stick. However, the challenge for most parents lies in providing the freedom to experience success, and more importantly, to make their own missteps before the stakes become too great. Luckily, we’ve compiled some tips to help you get started.
Establish Income and A Financial Plan for Your Child
First of all, your child needs income to learn that money is limited and gain exposure to how finances work for adults. Without these lessons, any other financial guidance you try to instill won’t be nearly as valuable.
In this case ‘income’ doesn’t mean that your child has to get a job. You can start by finding areas around the house or in your own business where your child can add value. Then, pay them a wage for their efforts. Alternatively, you can establish savings as a means of income to teach the value of savings and compounding – but this requires a significant balance to generate enough income to be effective.
Once your child has income, you can teach them how to manage it. Start with a checking account in their name and a debit card for their frequent purchases. Your child is much more likely to be engaged in a discussion of budgeting when it relates to their own income and the things they want to buy.
Also open a savings or investment account for your child and help them decide the right amount to contribute each month. The decision will mirror the choice they will have to make later in life between saving for the future and getting what they want in the present.
By establishing an income, savings, and a budget with your child, you can create a microcosm of what they will experience as an adult. On this small scale, they are free to make mistakes without ruining their credit or their financial future.
Include Your Children in Your Own Budget and Financial Plan
Your child will likely have a very limited income and budget. For this reason, including them in your own money management tasks can help them apply the skills they’ve learned on a larger scale.
To include your child in your budget, set a monthly meeting to discuss income, bills, savings, and the money that is left over for “fun” purchases. Then, let your child help determine how the “fun” money should be spent.
In addition to budgeting, include your child in financial planning. One of the most disheartening experiences for young adults is seeing how much of their paycheck should be devoted to their daily expenses and retirement savings. You can ease this disappointment by sharing your own experience.
An effective way to include your child in financial planning is to bring them to your annual meeting with your financial advisor. As you’ve probably learned, children sometimes listen more closely to people other than their parents. For this reason, exposing your children to financial knowledge from a third party can help your lessons stick.
Further, when your child asks you to buy something, it is certainly easier to say “yes” or “no” than explain the intricacies of your budget. However, every time you use “because I said so” as a rationale, you are missing an opportunity to help your child develop their own money management skills.
Input into the family budget and spending decisions gives your child a sense of responsibility. It can also limit spur-of-the-moment purchases and prepare them to police their own spending as an adult.
Use Large Purchases as A Lesson in Debt Management
The moment your child turns eighteen, credit card companies and other lenders have free rein to target them with advertisements. It is imperative that they have the skills to manage the debt they will be offered. However, simply telling your child not to apply for unnecessary credit won’t get you very far.
To capture your child’s attention, you need to make debt management lessons applicable to their current situation. One way to do this is by simulating the effects of credit card interest.
For example, if your child wants to buy concert tickets that are $500 but they don’t have the money saved, lend it to them. Require them to make monthly payments with interest as if you were a credit card company. Within a few months, they will be tired of paying for something they already experienced, and this can lead to a beneficial change of perspective.
Other major purchases – like a car – also provide opportunities to teach your children about compound interest. If your child wants the car badly enough, they will take the time to understand the total cost including monthly payments, interest, and maintenance.
In short, your child is more likely to engage if a financial lesson is tied to something they want. With the dangers of debt, it is vital to use these opportunities to instill healthy habits.
Improve Your Own Financial Literacy
You can’t impart knowledge that you don’t have, so it makes sense to grow your own financial literacy while helping your children improve theirs. To further engage with your children, make financial knowledge a joint goal. Share articles and videos that you found helpful and have your children do the same.
As you teach your children about finance, keep your eyes open to lessons you can learn. Your child could bring an insightful perspective to your current budget. You may even be forced to confront some bad financial habits you’ve allowed to infiltrate your budget. When your children identify these learning opportunities, don’t forget to engage an experienced financial advisor for guidance.
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At Meld Financial, we believe that financial education can help you make better decisions and reach your goals faster. That’s why our advisors regularly produce articles – like this one – to help your family reach their financial goals. To find more of our helpful articles, visit MeldU – our hub for financial information, events, and more.
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